A very fine line, by Alison Scott

As budget-setting draws to a close, chief financial officers in local government need to perform a delicate balancing act to ensure that all goes well

As budget-setting draws to a close, chief financial officers in local government need to perform a delicate balancing act to ensure that all goes well

The economic downturn and unprecedented spending cuts have placed chief finance officers in an exceptionally tough position – supporting their authorities as they make the difficult choices, while ensuring that they fulfil their legal and professional responsibilities in the public interest.

Of course, CFOs do not act in a vacuum and in such challenging situations it becomes all the more important for them to provide timely, relevant and reliable advice, in accordance with the law and professional standards, and to use their statutory powers appropriately.

In addition, financial management takes place within a broader governance code, which places the CFO’s responsibilities as part of a framework for ensuring effective decision-making, risk management and operations.

The whole council should be able to rely on this code and on the professional skills and advice of its chief executive and all its senior officers, including its CFO, in approving the budget.

CFOs’ vital role in positively influencing the budget-setting process and in finding sustainable solutions for the future is detailed in CIPFA’s Statement on the role of the chief financial officer in local government. However, they also have statutory duties to ensure that local authority budgets remain robust.

The 2003 Local Government Act requires the CFO to report on the robustness of the budget and on the adequacy of proposed financial reserves – and the council must pay due regard to this when it sets the budget.

It is important to view the CFO’s responsibilities under the 2003 Act as part of a continuum of professional advice, with the formal report the culmination of a budget process in which a lot of detailed work with service managers, corporate management teams and councillors has already taken place. Any concerns CFOs may have about the robustness of budgets should be well rehearsed and hopefully settled before the report is written.

Given the uncertainties of the economic environment and the scale of the expenditure reductions required, there will inevitably be significant risks involved in delivering balanced budgets.

In carrying out their professional responsibilities, it will be critical that CFOs take a risk management approach in their reports, setting out the main risks associated with the proposed budget and how they can be managed. Depending on the level of assessed risk within the proposed budget, it might be necessary to consider contingency plans.

This approach is likely to be particularly important when it comes to producing the savings required in budgets. CFOs should clearly set out the risks associated with their achievement and the implications for other spending during the year and any contingency plans if the savings are not delivered.

The ultimate recourse of the CFO remains the section 114 powers of the Local Government Finance Act 1988. These are not to be taken lightly and should be used very carefully and only after great consideration.

Section 114 requires the CFO, in consultation with the council’s monitoring officer, to report to all the authority’s members if (in broad terms) there is, or is likely to be, an unbalanced budget. This would include situations where reserves have become seriously depleted and it is forecast that the authority will not have the resources to meet its expenditure in a particular financial year.

The issue of a section 114 notice has serious operational implications. Indeed, the authority’s full council must meet within 21 days to consider the notice. During that period, the authority is prohibited from entering into new agreements involving spending.

Once the budget comes into effect, effective budget management systems still need to be maintained. The statutory responsibility to report on the robustness of the budget is an annual requirement but the professional responsibilities, budget and risk management processes that underlie it are ongoing.

Given the scale of reductions that have been made in this year’s budgets and the huge implementation issues that are likely to remain from large-scale service changes, budget implementation and monitoring will have to take account of a wide range of risks and interacting factors.

The CFO’s role will be critical in ensuring that local government as a whole ensures the budgets now being set are met in practice.

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